How to Build an Emergency Fund

A huge car repair bill. An unexpected medical expense. Or even an out-of-the-blue layoff from your job.

These are examples of unexpected financial situations that can affect any one of us and cause you to feel stressed.

You can help reduce this potential stress by building an emergency fund. With a little planning and budgeting, you can create an emergency fund that will help you get through a short-term cash crunch, while keeping you on track for your long-term financial goals.

Below, we'll walk you through how to build that safety net.

What is an emergency fund?

First of all, an emergency fund is a reserve account that is purposely built to help you cover your short-term expenses on an immediate basis. Therefore, it must be kept somewhere that will allow you almost instant access.

You’ll want to create an emergency fund just like you’ve created accounts for other specific purposes, like your retirement savings or holiday spending.

Why do you need an emergency fund?

You likely have to ensure your bills are covered. But if you only plan for those amounts, then a large or unexpected expense could quickly sidetrack your plan. Even if you put the recommended 10% of your monthly income into your savings, you could still fall short in a crisis.

And you wouldn’t be alone. Short-term cash flow is a struggle for many people. In fact, a recent survey revealed that a shocking 64% of all Americans could not afford an unexpected expense of just $400. And nearly one in four U.S. adults say they have no emergency savings at all.

If this sounds familiar, an emergency fund is the perfect place to start. This buffer will protect you from the snowball effect of a financial shortfall. By having a fund to tap into, you’ll avoid missing payments or racking up balances when the you-know-what hits the fan. So, let's get your emergency fund started!

How much do you need to keep in your emergency fund?

This is an individual question, based on a lot of factors, including your lifestyle, spending habits and current financial obligations. But most experts agree that you should save enough money to cover at least three times your monthly net pay, and six times, if at all possible.

We get it. Accumulating six months’ worth of your net pay can seem pretty daunting. But you don’t need to do it all at once. The key is to set a target, make a plan, and start small. Committing to making regular deposits into your fund will add up over time – and pay off in the long run.

To calculate what you’ll need, add up all of your monthly expenditures. You know your rent/mortgage and utility payments. But don’t forget to factor in food, gas, cable, and cell phone costs, along with your discretionary spending.

Check out our monthly savings calculator to help you determine your goal.

Where’s the best place to keep your emergency fund?

The best options are to keep your funds in a regular savings or money market account. These can often provide a small amount of interest, while allowing for quick access to your funds.

That said, you don’t want to make your funds too easy to access. Making it more difficult can help reduce impulses to tap into them. For that reason, some experts recommend keeping your emergency fund account at a different financial institution altogether.

You should also avoid putting your emergency funds in financial vehicles like savings certificates, mutual funds, or individual retirement accounts. While these may offer higher returns, they cannot be accessed immediately without penalties, fees, or even a requirement to pay federal taxes.

How can you save for an emergency fund?

This is where a detailed monthly budget comes in handy. This will enable you to see all of your expenses at a glance, and help you identify opportunities to save. It’s all about taking control of your future. As the saying goes, if you save your money, your money will save you.

To learn more, watch our webinar “Get Smart About Savings.”

It can help if you think of your emergency fund as another bill. Some classic ways to save money to help pay this bill include:

• Automating your savings by setting up a direct deposit into your emergency fund.
• Implementing a “round-up deposit” with “Change Jar” from VACU. Learn how here.
• Reviewing your mobile and entertainment subscriptions. You could identify many you could cut.
• Shopping around for lower prices on food, clothing, gas, etc.
• Unsubscribing from enticing marketing emails. Eliminating these emails will eliminate a lot of temptation.
• Transferring the extra cash you get from a raise into your emergency fund, instead of spending it.
• Creating a financial vision board so you can see a tangible representation of your savings goals.
• Cutting back on expenses like lattes or eating out.
• Starting a side hustle.
• Holding yourself accountable. Enrolling in the America Saves program can help.

For even more savings tips, click here.

Emergency fund tips

There’s a reason you call it your emergency fund. Because that’s what it’s intended for. What's an emergency? Some are obvious, but it's your money so you can define your own boundaries. This could mean any extra expense for which you did not plan, or obligation you must meet, like:

 Paying your mortgage or rent

 Ensuring you do not fall behind on debt

 Paying for a critical medical or dental procedure

 Paying for “must-do” repairs on your car

 Paying for excess spending on items like groceries that are outside your normal budget

Make a plan to pay yourself back

When you finally do build up a healthy balance in your emergency fund, you might allow yourself to dip into it now and again. Want to buy an expensive gift? Or treat yourself to a weekend getaway? Go for it. Just be sure to have a plan to pay yourself back.

Whether you tap into your back-up fund for an emergency or not, the key is to replace any withdrawals you make as soon as possible. Think of it as taking a loan from yourself. As soon as you are able, you should pay yourself back so you can bring the fund back up to your six-month reserve levels.